DO NOT COPY FROM PREVIOUS ANSWER Problem for Strategic Profit Model Assignment W
ID: 2801247 • Letter: D
Question
DO NOT COPY FROM PREVIOUS ANSWER
Problem for Strategic Profit Model Assignment
Week 5
Dog-Ann is a pet supplies company serving in Midwest. It sells pet supplies and provides pet grooming and training services. Table 1 shows the income statement of Dog-Ann for the previous year.
Sales
$250,000
Cost of Goods
$150,000
Fixed Assets
$105,000
Variable Expenses
$25,000
Fixed Expenses
$35,000
Inventory
$10,000
Accounts Receivable
$5,000
Other Current Assets
$5,000
a) Develop the strategic profit model of this organization and draw the diagram.
b) What is the firm’s profit margin?
c) What is the firm’s ROA
Suppose the firm undertakes a supply chain improvement project. It improves its service level to customers by opening more warehouses which means it will be able to deliver more quickly to customers. The result is a 10% increase in sales. Assume cost of goods sold increases by 6%. The new warehouse requires additional new asset investment of $40,000. Fixed expenses increase by $1,000 because of the expense of operating the warehouses. Assume other variables do not change. Answer the following three questions based on this information.
c) Show the new strategic profit model.
d) What is the new asset turnover?
e) What is the firm’s new return on assets?
Sales
$250,000
Cost of Goods
$150,000
Fixed Assets
$105,000
Variable Expenses
$25,000
Fixed Expenses
$35,000
Inventory
$10,000
Accounts Receivable
$5,000
Other Current Assets
$5,000
Explanation / Answer
1. Strategic Profit Model is nothing but dupont Analysis, which describes efficiency of the orgnization to turn Assets and Investments into profit.
It is measured in terms of Return of Equity as product of Return on Assets and Financial Leverage
Retun on Equity (Net Profit/Equity) -----------> Return on Assets ----------> Asset Turnover Ratio X Net Profit Margin
X
Financial Leverage ---------> Total Assets/Equity.
In above Case, based on data given
Asset Turn Over Ratio = Net Sales/Total Assets = 250000/125000 = 2.00
Net Profit Margin = Net Profit/Net Sales.
Net Profit = Net Sales - COGS - Variable Expenses - Fixed Expenses
= $ 40000
Net Profit Margin = 40000/250000 = 16%
Financial Leverage = Total Assets / Equity
2. Net Profit Margin = Net Profit/Net Sales.
Net Profit = Net Sales - COGS - Variable Expenses - Fixed Expenses
= $ 40000
Net Profit Margin = 40000/250000 = 16%
3. ROA = Net Profit/Total Assets = 40000/125000 = 0.32 or 32%
Now, the firm undertakes a supply chain improvement project. It improves its service level to customers by opening more warehouses which means it will be able to deliver more quickly to customers. The result is a 10% increase in sales. Assume cost of goods sold increases by 6%. The new warehouse requires additional new asset investment of $40,000. Fixed expenses increase by $1,000 because of the expense of operating the warehouses. Assume other variables do not change.
Revised Sales = 250000 * 1.10 = $ 275000
COGS = 150000*1.06 = $159000
Variable Expenses = $ 25000 (Unchanged)
Fixed Expenses = $ 36000
Net Profit = Net Sales - COGS - Variable Expenses - Fixed Expenses = $ 55000
With $ 40000 of additional investment, New Asset level is $ 165000
d) New Asset Turnover = Revised Net Sales /Revised Assets Level
= 275000/165000 = 1.67
e) New Return on Assets = 55000/165000 = 0.3333 = 33.33%
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